PUBLISHED IN THE INSTITUTE OF PETROLEUM UK RETAIL MARKETING SURVEY 1997
PRICE WATCH - THE AFTERMATH
By Adrian Camps
Few people involved in the petrol supply or oil industry can be unaware of Esso's "Price Watch" petrol discounting scheme, which has had the most significant impact on petrol retailing in the last decade. The foundations for this price cutting craze amongst the oil companies, which in some cases lead them to retail petrol at a loss, was set in the early 1980's.
Planning policies in the 1980's were favourable to out of town development and these policies, together with high profits in the food retailing industry lead to a massive expansion of hypermarkets throughout the Country. As the stores became more sophisticated, so did the petrol forecourts and the majority of these later developments were placed so as to have a high degree of prominence to the main road.
The Hypermarket operators also introduced substantial discounting against conventional oil company prices. For a number of years in the late 1980's and the early 1990's savings of between 2p and 4p per litre could be achieved by filling up at a hypermarket service station. These savings soon resulted in hypermarkets increasing their market share quite significantly.
Whilst accurate figures are hard to obtain because of the confidentiality surrounding the disclosure of site volumes, it is presently estimated that hypermarkets have approximately 25% share of the UK retail petroleum market.
At the end of 1990 there were 434 hypermarket sites with petrol facilities, in the United Kingdom and at the end of 1995 there were 776 hypermarket sites. The increase in hypermarket growth is even more dramatic, when viewed against a backdrop of the total number of sites in the UK. In 1986 there were 20,641 but by the end of 1995 this had fallen to 16,244 sites.
By the early 1990's most of oil companies were responding to the pricing structure introduced by hypermarkets in their locality, both on company owned and dealer sites, although pricing strategy was very much localised, there being substantial regional variations.
The first of the major oil companies to announce its pricing policy on a national basis was BP. In October 1994 Rolf Stomberg, chief executive of BP Oil Europe, confirmed that BP would be pricing nationally in response to hypermarket pricing.
BP advertised its price cutting policy widely, and it was only a matter of time before other major oil companies followed. Esso commenced trials of its "Price Watch" scheme in the north east of England and Scotland in Autumn 1995, where they undertook to match hypermarket prices within three miles of their sites.
In October 1995 Shell announced its intention to undercut or match Esso in its "Price Watch" areas.
In January 1996, Esso went nation wide on "Price Watch" with a public undertaking to check prices daily and be amongst the very lowest in the country. This was followed up with a significant television and radio advertising campaign, the basic criteria being that Esso would match the lowest price within a three mile radius.
Most other oil companies followed suit to varying degrees. Shell announced publicly that they would be matching or undercutting Esso. BP announced its "Focus on Price" scheme. A number of Q8 sites had "Price Watch Here" displayed. Elf displayed a picture of an Owl with the motto "Prices Watched Here". Murco announced that they were "Price Aware", Texaco had "Price Check" and Total had "Price Watch".
The hypermarkets responded publicly that they would not be undercut, Tesco started offering club card points on petrol purchases. Other hypermarkets offered various incentives.
THE DEALER NETWORK
Most independent petrol station owners, or dealers, enter into "supply" or "tie" agreements with an oil company, undertaking to take supplies only from that company, for a fixed period, normally five years. The margin that the Dealer receives, is set on the signing of the agreement and often this related to the volume the site sells. This system has worked well where fuel retail prices were relatively stable.
Oil companies often grant price support, where they agree to match the average price of two or three competitor sites in the area, helping to retain the dealer's margin. The problem is that the level of support is usually at the supplying company's discretion. "Price Watch" and the other discounting schemes have had a substantial impact upon the margin and rebate deals which oil companies are now prepared to offer to independent dealers. Where price support is given by the oil companies, this is often on the basis of a substantially reduced margin and rebate.
A number of companies have indicated that the margin and rebate deals which are being offered are at about half their previous level with figures of about 2.6 to 3.4 pence per litre (12 to 15 p per gallon) being quoted in the market. In some cases higher figures are available, but often these are offset by limited price support. In such cases, for a dealer to retain competitive pricing he has to cut into his profit by providing his own discounting, or face a loss in volume. It most cases oil companies are unwilling to commit themselves as regards the level of price support that they are prepared to give their dealers, which in turn makes it difficult for the dealer to assess the site viability or run the site profitably.
Many sites have been rendered non-viable by the lack of profitable supply agreements and at the height of the price war some oil company sites were retailing fuel at below the wholesale purchase price. There has been a sharp increase in the number of site closures and of sites coming onto the market. A number of oil companies are refusing to renew unprofitable supply agreements, which will probably leave dealer sites unable to obtain new agreements upon favourable terms.
In some ways the "Price Watch" scheme seems to have paid off for Esso and the other Major oil companies. Esso now claims to have a million new customers per week and other majors have gained a significant market share.
Some stability has returned to the market, with an increase in petrol prices, over and above the increase in the crude oil price, although margins to oil companies continue to be very tight. Some oil companies are working on a margin of 1 to 1.5 p per litre, in price sensitive areas. There is now often little differential in pricing between the hypermarket forecourts and the surrounding petrol sites.
THE FUTURE FOR PETROLEUM RETAILING
This is a time of great change for the oil industry, especially at the downstream end of the operation. Most oil companies were hit by an oil price, which in real terms was at its lowest level for thirty years, although recently this has recovered. They have also seen retail margins slashed by price competition introduced by Hypermarkets and other discounting operators.
Most oil companies have been cost cutting, to make themselves competitive in a market of reduced margins. Examples of this is are the recent mergers between BP and Mobil and the merger between Gulf, Elf and Murco to create GEM petroleum. Most observers feel the mergers will be used to achieve substantial savings by increasing market share and rationalising the distribution network.
The long term effect of the price wars within the industry will be a sharp reduction in the number of independent operators in the industry due to the poor margins and profitability. Many of these sites are being permanently decommissioned, the better ones are being bought or leased by the oil companies.
PETROL RETAILING IN THE YEAR 2000
There has been a tendency for forecourt shops to get larger over the last decade, but the forecourt shop of the year two thousand will have little resemblance to the dusty kiosk with a display of engine oil, fan belts and little else.
Following the erosion of profits in fuel retailing, most oil companies have looked to other profit centres on their sites. We have seen coffee shops, in store bakeries, groceries and even take away pizzas introduced into forecourt buildings.
In late 1995 Tesco opened two pilot "Tesco Express" stores in London. The concept was a large forecourt selling fuel at Hypermarket prices and a large convenience store of about 200 m2, selling food at supermarket prices.
Many oil companies have begun to adopt this idea for their larger sites, although few have been prepared to go it alone.. Last year, BP announced its joint venture with Safeway, whereby selected sites would be redeveloped with a 150 to 200 m2 shop which would be stocked and run by Safeway.
A number of other oil companies have their own projects, Q8 have linked with Budgen, Total with Alldays, Elf with Somerfield and most other oil companies have their own in house merchandising schemes.
It is a reflection on the state of the market that the oil companies and hypermarkets who only 18 months ago were on opposing sides in a price war, should join together to promote retail on petrol forecourts.
Although matching hypermarket prices is not seen as essential in most forecourt convenience stores as a significant proportion of custom is on the basis of a 'distress purchase', most oil companies have come to recognise that the considerable buying power, logistics network and merchandising skills that the hypermarket operators possess are of great value.
Most of the major oil companies are now proposing the provision of large convenience stores on sites throughout the country. The customer of the year 2000 will be able to purchase newspapers, groceries, frozen food, visit the cash dispenser and fill up with petrol all at his local petrol forecourt.